PCP Myth #9: There’s no risk because of the GFV
The Bank of England has been looking into the car finance market over the last year because it’s concerned about the amount of debt racked up by car buyers each year (it’s more than £40 billion a year) and what might happen if the economy stumbles.
Car dealers and industry representatives love to tell you about how protected you are with a PCP, and that the finance company is taking all the risk because of the guaranteed future value (GFV). So if the economy turns bad, the consumer is protected and the finance company takes the loss. There’s some truth in that, but as with everything else on this list, it’s certainly not the whole truth and nothing but the truth.
The GFV only applies at the end of the agreement if you: a) choose to hand the car back to the finance company, and; b) have complied with all the mileage/servicing/condition requirements of your contract. In that specific case, if the car is worth less than the GFV then that’s not your problem and the finance company absorbs the loss.
The finance company’s risk only kicks in at the very end of the agreement. So if you have a four-year PCP, you are responsible for the debt from Day 1 until Day 1,461. It’s only on Day 1,462 that the finance company takes any risk for the value of your car.
If you need or want to change the car before your PCP ends, any negative equity is your problem, not the finance company’s (see Myth #6) because you can’t claim the guaranteed value until the end of the agreement.
If your financial circumstances change during the course of the agreement for any reason, you still have a large debt that needs to be paid off. If you lose your job, get sick, have unexpected legal costs or anything else pops up that stops you from paying your monthly PCP bill, you will eventually find yourself in trouble and the finance company will be looking to reclaim every penny you owe – regardless of what your car is worth. You will probably end up in a voluntary surrender position (as we discussed in Myth #5) and be doorstepped by collections agents before long.
Also, as we outlined all the way back in Myth #2, PCPs are usually sold on the promise of equity at the end. If the value of the car drops below what’s expected, your expected equity goes out the window before the finance company starts losing anything.
As we all found out during the credit crisis of a decade ago, normal borrowers lose their shirts well before the bank starts to suffer. Even if they do lose, you will have already lost too.
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PCP Myth #10: A PCP is more flexible than other forms of finance
Finance companies like to advertise PCPs as being “flexible”. Some brands even call their PCP offers “Flexible Finance”. In reality, the most flexible part about that is their definition of the word “flexible”.
What they really mean is that a PCP allows buyers to buy a more expensive car than they can on a traditional HP, because you’re not paying back the whole thing back. Alternatively, the same car will have a much lower monthly payment on a PCP than on an HP. That’s really their definition of “flexible”.
Compared to a hire purchase or a personal loan, a PCP has more restrictions and conditions on mileage, servicing and vehicle condition. There are limits on the maximum deposit you can put in. There are stricter limits on how long you can borrow the money over (usually a maximum of 48 months for a PCP compared to 60 months or even longer for an HP or personal loan).
With a PCP or HP, you can’t sell the car if you get into financial trouble like you can with a personal loan. Nor can you transfer it into someone else’s name (like your spouse or partner), which again you can do with a personal loan. You do have voluntary termination rights that you won’t get with a personal loan or a lease, but as we’ve discussed in Myth #5, that’s often not a lot of use.
Ultimately, a PCP is one of the least flexible forms of car finance. The only thing less flexible is leasing, and that’s renting rather than borrowing, so it’s not the same thing.
This article was originally published in April 2018, and was most recently updated in July 2019.
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